Tech spending edges towards mainstream
Has the hi-tech miracle economy faltered once and for all, or is it a natural correction? Colin Kruger reports.
First it was the dot coms; then the tech vendors were brought to their knees by successive downturns and unprecedented slowdowns in demand for technology. Has the business sector finally tired of the burgeoning tech spend?
The answer may lie in an article written more than 15 years ago and presented at an IDC conference last month by the IT research firm's senior vice-president, Philippe de Marcillac.
The revolutionary product took the world by storm, he read to the audience. The industry responded to the feeding frenzy. New industries grew up. Entrepreneurs rocketed to millionaire status. VCs funded anything that seemed remotely related to the revolution.
Then came the bust. Stock prices halved. The boom had lasted five years. The technological flowering was over. Becoming a millionaire was hard again.
But it was in the ensuing decade that the revolution really entered the mainstream of business, long after acquiring the new technology had ceased to be a major corporate event.
Do these words have a familiar ring? This extract is from an article by the IDC analyst John Gantz and appeared in Infoworld Magazine in February 1985. The story was published in the aftermath of the PC stock crash but referred to an earlier stock bubble the 1969-70 business-computing market crash.
No, this isn't the first tech bubble to burst, and the themes are similar. IDC predicts that we are entering another period of rejuvenation as the next-generation Internet gains traction and takes off in the way that the PC revolution did in 1985, producing tech titans such as Intel, Microsoft, Compaq and Apple.
"We are in the middle of the transition to the real new economy," Marcillac said. "Internet 1.0 is dead and we are well on the way to Internet 2.0."
IDC says that a similar situation faces the online economy and the tech vendors that will be swept up in a new IT spending frenzy.
"The shakeout is not fundamentally connected to the long-term growth in our industry," Marcillac said. He predicted that in the US alone, spending on Internet commerce and Web infrastructure would reach $US3 trillion ($5.8 trillion) by 2005, compared with less than $US1 trillion now.
While all sectors are expected to prosper from the new boom, a key to the recent tech-stock crash was that while product-orientated companies such as Cisco suffered, service-orientated companies such as IBM still grew. In its most recent quarterly figures, IBM reported revenue growth of almost 9 per cent and profit increase of 15 per cent.
The upturn is expected to be primarily Web-driven and services-orientated as companies shy away from doing everything in-house. "They are replacing IT assets with services," explained Rolf Jester, an analyst with IT research firm the GartnerGroup. He expects the growth of service providers offering business process outsourcing and application rental services to be major trends in the near term that will drive services growth in Australia to close to 20 per cent a year.
The big daddy of them all, though, is expected to be the business-to-business (B2B) market which will drive a major shift in spending as companies look to lower their costs and prices, improve supply chains and access new markets.
"Business-to-business is where the growth is," confirmed the IDC analyst Brook Galloway, who predicted that B2B commerce in Australia would grow from $US5.2 billion this year to $US114 billion by 2005.
And the IT industry won't be left behind. Renovating Web sites to offer the full functionality needed for Internet 2.0 as opposed to the still predominantly brochureware sites of today is expected to cost anywhere between five and 10 times a Web site's initial development costs. IDC expects that by 2004 this will generate global sales of $US24 billion in e-commerce software and $US47 billion in supply-chain automation software alone.
While online business exchanges and corporate services are expected to drive most of this spending, the growth in consumer numbers online will also be an influence. The Web population is predicted to increase from an estimated 400 million last year to 900 million by 2004. This is expected to drive a 600 per cent increase in consumer spending to $US500 billion worldwide by 2004.
But haven't we heard these rosy predictions before? It was only last quarter that Cisco, the titan of the new economy, suddenly hit a brick wall with a revenue shortfall of 30 per cent from that of the previous quarter; Cisco is paying for it with the loss of 8,500 staff and a $US2.5 billion inventory writeoff. Should we still trust the analysts whose collective crystal-ball gazing paints such a rosy scenario?
The final word should go to Network Appliance's CEO, Dan Warmenhoven. His company is one of the hottest vendors in the data storage market, a technology that is vital to corporate networks and just as readily consumed.
"I can't imagine a scenario that says the sun won't rise and data won't grow," Warmenhoven said during a recent visit to Australia. Nevertheless, in January the lights went out. "It's like the whole economy stopped," he said. "I concluded at that point that my crystal ball was broken."
